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Exam 6: Accounting for Financial Management

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Question 31

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Wells Water Systems recently reported $8,250 of sales,$4,500 of operating costs other than depreciation,and $950 of depreciation.The company had no amortization charges,it had $3,250 of outstanding bonds that carry a 6.75% interest rate,and its federal-plus-state income tax rate was 35%.In order to sustain its operations and thus generate sales and cash flows in the future,the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.How much free cash flow did Wells generate?

A) $1,770.00
B) $1,858.50
C) $1,951.43
D) $2,049.00
E) $2,151.45

F) None of the above
G) B) and D)

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Question 32

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The income statement shows the difference between a firm's income and its costs⎯i.e.,its profits⎯during a specified period of time.However,not all reported income comes in the form or cash,and reported costs likewise may not correctly reflect cash outlays.Therefore,there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

A) True
B) False

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Question 33

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Last year,Michelson Manufacturing reported $10,250 of sales,$3,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had no amortization charges,it had $3,500 of bonds outstanding that carry a 6.5% interest rate,and its federal-plus-state income tax rate was 35%.This year's data are expected to remain unchanged except for one item,depreciation,which is expected to increase by $725.By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

Jessie's Bobcat Rentals' operations provided a negative net cash flow last year,yet the cash shown on its balance sheet increased.Which of the following statements could explain the increase in cash,assuming the company's financial statements were prepared under generally accepted accounting principles?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have? $\begin{array} { l r } \text { Sales } & \$ 2,000.00 \\\text { Costs } & 1,200.00 \\\text { Depreciation } & 100.00 \\\text { EB IT } & \$ 700.00 \\\text { Interest expense } & 200.00 \\\text { EBT } & \$ 500.00 \\\text { Taxes } ( 35 \% ) & 175.00 \\\text { Net income } & \$ 325.00 \\\end{array}$

Which of the following statements is CORRECT?

In accounting,emphasis is placed on determining net income in accordance with generally accepted accounting principles.In finance,the primary emphasis is also on net income because that is what investors use to value the firm.However,a secondary financial consideration is cash flow,because cash is needed to operate the business.

The retained earnings account on the balance sheet does not represent cash.Rather,it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Total net operating capital is equal to net fixed assets.

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Which of the following statements is CORRECT?

Olivia Hardison,CFO of Impact United Athletic Designs,plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds.Assume that the company,which does not pay any dividends,takes this action,and that total assets,operating income (EBIT) ,and its tax rate all remain constant.Which of the following would occur?

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends,and the riskiness of those cash flows.

Zumbahlen Inc.has the following balance sheet.How much total operating capital does the firm have?

HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation) .The company had $18,750 of investor-supplied operating assets (or capital) ,the weighted average cost of that capital (the WACC) was 9.5%,and the federal-plus-state income tax rate was 40%.What was HHH's Economic Value Added (EVA) ,i.e.,how much value did management add to stockholders' wealth during the year?

Barnes' Brothers has the following data for the year ending 12/31/2015: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100.Barnes' weighted average cost of capital is 10%.What is its economic value added (EVA) ?

To estimate the cash flow from operations,depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.